Detroit’s bankruptcy exit plan cuts pensions, targets blight

Originally published February 21, 2014 at 9:59 pm

Updated February 22, 2014 at 1:16 am

A vacant, boarded up house is seen with downtown Detroit in the background. When the city filed for bankruptcy in July, it reported having 78,000 abandoned and blighted residential buildings, about 20 percent of the housing stock.

DETROIT — Detroit presented its first full road map for leaving bankruptcy Friday, outlining a plan to restructure $18 billion in debt, demolish thousands of blighted homes and invest in the broken-down infrastructure that has made the city a symbol of urban decay.

If approved by a judge, the proposal would sharply reduce payments to some retirees and creditors. Pension holders could expect to get 70 to 90 percent of what they are owned, while many banks would receive as little as 20 percent.

The plan, which is sure to be the subject of court challenges, envisions a leaner, cleaner and safer Motor City after its crushing financial burdens are lifted.

“There is still much work in front of all of us to continue the recovery from a decades-long downward spiral,” said Kevyn Orr, the city’s state-appointed emergency manager.

Orr’s so-called plan of adjustment “provides the best path forward for all parties to resolve their respective issues and for Detroit to become once again a city in which people want to invest, live and work,” he said.

Gov. Rick Snyder called the plan “a critical step forward.” But it leaves unanswered many questions, including whether creditors and labor unions will accept the deal or fight it, and how long that process might take.

The package calls for awarding police and fire retirees at least 90 percent of their pensions after eliminating cost-of-living allowances. Other retirees would receive at least 70 percent.

It still doesn’t seem fair to Janice Pegg, 67, who receives the pension left by her husband, Victor, a Detroit police officer who died two years ago.

“He earned these benefits through his hard work, through his labor, through wage freezes back when he was employed,” Pegg said.

Orr has said he would like the city to emerge from the nation’s largest municipal bankruptcy by the fall, when his term is up.

Some creditors have complained that the plan improperly favors Main Street over Wall Street, something that could chill lending to other cities, especially those with troubled pension plans.

Bankruptcy attorney and St. John’s University law professor Anthony Sabino said the plan could spark an argument between city workers and retirees and police and firefighters.

Orr “wants to have the firefighters and police have 90 percent and other city workers cut back to two-thirds,” Sabino said Friday. “The other unions will say, ‘Even if we’re uneven, we should be closer.’ It does create an inequity that is going to have to be addressed in court.”

Detroit’s woes have piled up for generations. In the 1950s, its population grew to 1.8 million people, many of whom were lured by plentiful, well-paying auto jobs.

Later that decade, Detroit began to decline as developers starting building suburbs that lured away workers and businesses.

Beginning in the late 1960s, auto companies began opening plants in other cities. Property values and tax revenue fell, and police couldn’t control crime. In later years, the rise of autos imported from Japan started to cut the size of the U.S. auto industry.

By the time the industry melted down in 2009, only a few factories from GM and Chrysler were left.

Detroit lost a quarter-million residents between 2000 and 2010. Today, its population could fall as low as 680,000, according to Orr.

Of the city’s $18 billion in debt, about $12 billion is unsecured, Orr said, meaning there is no tax revenue or other money to pay it.

The city wants to spend $500 million to knock down up to 450 decaying, abandoned properties each week. Those buildings are Detroit’s most visible eyesores and magnets for criminal activity.

As they demolish problem properties, officials want to reinvest by giving police, firefighters and ambulance crews better equipment that will produce faster response times. The plan also calls for fixing the city’s troubled electrical grid and street-lighting system, which has deteriorated to the point where many neighborhoods descend into blackness after sundown.

One of the touchiest issues is the fate of about 2,800 city-owned treasures in the Detroit Institute of Arts. Those masterpieces have been at risk of being auctioned to raise money to repay creditors.

Foundations and others have pledged $365 million toward pensions to keep the art from being sold. The governor has said he will seek $350 million from the state to aid that cause, while the museum raises $100 million.

But that money depends on both pension systems approving Orr’s plan.

Missing from the city’s proposed plan of adjustment is a deal to spin off the Detroit Water and Sewerage Department, which the city has estimated could be worth $1.9 billion over 40 years to the city. The city is still negotiating a potential water deal, which suburban politicians have opposed.

Orr had hoped creditors would sign off on the plan before he submitted it to U.S. Bankruptcy Judge Steven Rhodes. But the clock was ticking because Rhodes had set a March 1 deadline.

The proposal depends on a series of outcomes that are unknown. Will Michigan lawmakers agree to send state money to help Detroit? Will lawsuits over various pieces of the case interfere? Will enough of Detroit’s creditors go along with the deal for Rhodes to approve it? How will the city function financially until a plan is implemented? And how long will all of this take?

A vote in favor of the plan by one class of creditors would be enough to send it to the judge, who would then hold trial-like hearings to determine if the proposal should be approved over the objections of other creditors.

Appeals are almost sure to persist even after the final version is endorsed by a bankruptcy court.

Material from The New York Times and the Detroit Free Press is included in this report.